Detroit Is Eligible For Bankruptcy Protection, Judge Rules

The Detroit skyline as seen from Windsor, Ontario, across the Detroit River.

Rebecca Cook Reuters/Landov

Originally published on December 4, 2013 1:55 am

The largest municipal bankruptcy in U.S. history took a major step forward Tuesday when a federal judge ruled that the city of Detroit is eligible for protection under Chapter 9 of the U.S. bankruptcy code.

The embattled city is trying to work its way out from under $18.5 billion in debt. In issuing his decision, Judge Steven Rhodes said "the court finds that Detroit was and is insolvent." Rhodes also said the city can seek to cut pensions for its retirees as it works to reduce its debt. He also cautioned, though, that such cuts must be fair and equitable — a signal he won't rubber-stamp the city's decisions.

Unions and pension funds had argued in court that the city did not bargain with them in good faith before filing for Chapter 9 protection. On that point, Rhodes had critical words for the city's negotiators: "Charitably stated, the [city's] proposal is very summary in nature," he said of Detroit's offer to unions and creditors. He also "scolded" the city for hurrying the negotiations, the Detroit Free Press reports.

But Rhodes concluded it would have been "impracticable" for the city to negotiate in good faith. "In other words," writes Detroit's WXYZ-TV, the city's financial situation was "so dire that negotiating in good faith would not have been realistic."

The city's bankruptcy case, Rhodes said, should not be dismissed over the "good faith" bargaining issue. "This case was filed in good faith and should not be dismissed," he ruled.

We've posted previously about what happens after a municipality gets bankruptcy protection. It's expected to be years before Detroit settles with all its creditors and finds ways to further reduce its labor costs and cut pension benefits. Federal bankruptcy courts will still be overseeing the process. Next up for the city, according to the Free Press:

"Emergency manager Kevyn Orr would proceed with plans to propose a massive restructuring plan, called a 'plan of adjustment,' by the end of the month. The plan would include offers to bondholders, retirees and unions and likely would also include the proposed sale of assets, such as [Detroit Institute of Arts] property and the city's water and sewer department. Several creditors have already signaled they plan to appeal."

-- "There could be big changes with union contracts, but it depends on how the bankruptcy judge responds to lawyer requests. Pensions for some retirees may not be altered, but those for current workers could be reduced."

-- "Under the federal bankruptcy code, neither a judge nor creditors can force the city to liquidate its assets. This is a decision the city or the emergency manager would make. It is possible that Detroit-owned assets will be put up for sale, but it isn't known when that would happen and which assets would be on the block. They could include anything from the Detroit Zoo to a van Gogh painting to the historic Fort Wayne, all assets the city owns, according to public filings and media reports."

As for how Detroit got into its financial mess, the Free Press says that "the answers may surprise you — and don't blame [former Mayor] Coleman Young."

Update at 11:45 a.m. ET. Appeal Expected:

Journalist Micheline Maynard, who tweeted updates throughout Tuesday's court action, writes that the American Federation of State, County and Municipal Employees "says it will appeal the #Detroit ruling to the 6th Circuit." But, she adds, "no stay is possible."